Does QE Cause Wealth Inequality? • Hacker News Board

Re: Does QE Cause Wealth Inequality?

#51

Post by short_sells_poo » Tue, Nov 16, 2021, 6:20 PM UTC

fdgsdfogijq wrote: post #12

How have people not caught onto this yet? When the Fed prints money, its a guaranteed bet that assets go up. The rich use their wealth and huge amounts of leverage via financial instruments to generate massive returns. This has been going on for a long time. Literally all you need to do is throw your whole bank account into call options. Working a 200k-300k a year job is almost a waste of time with how much money the…

Call options are a bad move to participate in equity upside, unless you are working on single stocks. There's little upside convexity at the index level. This is doubly true for someone who doesn't know how options work. You can easily end up out of the money with your entire option punt and lose everything even though equities go up (just not enough for your bet). Furthermore, the last couple of years the underlying indices realized better risk adjusted returns than almost any option strategy could hope for. If you want leverage, you can just buy the futures.

Re: Does QE Cause Wealth Inequality?

#52

Post by Clubber » Tue, Nov 16, 2021, 6:20 PM UTC

spamizbad wrote: post #21

photochemsyn wrote: post #8

It doesn't necessarily, but there are some issues to think about: 1) Interest rates that are low mean that middle-class savings accounts don't grown in size. QE requires low interest rates as I understand it. 2) MMT is linked to QE but guess what, an oligarchic system isn't going to distribute QE capital to middle class and poor people, it's going to go into the pockets of the ruling class. In any case, you really ca…

I don't understand how higher interest rates on savings accounts would meaningfully impact the middle class. The median savings account balance is just $5,300[1]. And the thing about savings accounts is that they generally do get spent down periodically - they typically aren't used to continuously squirrel away cash for decades, so you're not compounding interest over the long term. You might save for 5 years and the…

You get what you incentivize. We are currently incentivizing debt over savings, so that's what we get.

When I was in college, the bank would give something like 6-7% on savings. If I had a million dollars in the bank I could comfortably live off that interest for life. Now if I put a million dollars in the bank, I lose wealth due to inflation, so I'm incentivized to put it in a fund or something now, which is a lot riskier than bank interest.

Re: Does QE Cause Wealth Inequality?

#53

Post by short_sells_poo » Tue, Nov 16, 2021, 6:21 PM UTC

ed25519FUUU wrote: post #48

nprz wrote: post #32

Earlier quoted context omitted.

Why buy call options? Why not just buy and hold equities?

Because call options are a form of financial leverage, which is how the rich are getting much richer as the fed prints money

Call options are a rubbish way to do this, please don't spread this misinformation. If you want leverage, just buy the futures.

If you are thinking about punting your entire income into options on single stocks, and don't know what you are doing, just stop right there. You can easily lose everything even in a bull market.

Re: Does QE Cause Wealth Inequality?

#54

Post by xibalba » Tue, Nov 16, 2021, 6:21 PM UTC

Ericson2314 wrote: post #15

photochemsyn wrote: post #8

It doesn't necessarily, but there are some issues to think about: 1) Interest rates that are low mean that middle-class savings accounts don't grown in size. QE requires low interest rates as I understand it. 2) MMT is linked to QE but guess what, an oligarchic system isn't going to distribute QE capital to middle class and poor people, it's going to go into the pockets of the ruling class. In any case, you really ca…

The mainstream economic theory genuinely believed that handing out central bank securities would work just as well as, say. adjusting a UBI or normal fiscal policy. Yes, it's a suspiciously convenient idiocy --- especially because they also think wealthy households spend less (even if they don't think wealthy bussinesses do something similar) --- so certainly it's not something that can be completely fixed without a…

> revolution

Revolutions almost always result in prolonged mass violence. Most often of the horrific, needless, and soul shattering kind. A sampling of recent revolutions: the Bolshevik Revolution, the French Revolution, Cambodian civil war/Khmer Rouge takeover, Nazi takeover of Germany, Chinese Communist Revolution, the Cuban Revolution, etc etc.

I propose a new heuristic for my fellow HN'ers: if someone pines for revolution, its a very good signal that they are poorly acquainted with history or that they are a sociopath.

Re: Does QE Cause Wealth Inequality?

#55

Post by bhupy » Tue, Nov 16, 2021, 6:22 PM UTC

kranke155 wrote: post #45

88913527 wrote: post #29

When many people have few assets, and few people have many, and you cause the value of assets to go up, the nominal gap between two is larger, but the relative amounts are the same. This is basic math. Suppose we have two individuals who experience 25% growth due to QE: Person A: $1,000 * 25% growth = $1,250 Person B: $1,000,000 * 25% growth = $1,250,000 Originally, the wealth gap between A and B was 1000:1. It remai…

Thomas Picketty - didn’t he show returns on assets far outgain salary growth ?

That was his thesis, but it's since been questioned/refuted:

https://www.imf.org/external/pubs/ft/wp/2016/wp16160.pdf

> Using a sample of 19 advanced economies spanning over 30 years, I find no empirical evidence that dynamics move in the way Piketty suggests. Results are robust to several alternative estimates of r-g.

https://www.economist.com/briefing/2019/11/28/economists-are...

http://davidsplinter.com/AutenSplinter-Tax_Data_and_Inequali...

> Top income share estimates based only on individual tax returns, such as Piketty and Saez (2003), are biased by tax-base changes, major social changes, and missing income sources. Addressing these issues requires numerous assumptions, especially for broadening income beyond that reported on tax returns. This paper shows the effects of adjusting for technical tax issues and the sensitivity to alternative assumptions for distributing missing income sources. Our results suggest that top income shares are lower than other tax-based estimates, and since the early 1960s, increasing government transfers and tax progressivity resulted in little change in after-tax top income shares.

Re: Does QE Cause Wealth Inequality?

#56

Post by whimsicalism » Tue, Nov 16, 2021, 6:22 PM UTC

fdgsdfogijq wrote: post #43

jliptzin wrote: post #24

Earlier quoted context omitted.

Throwing your whole bank account into call options would be an extremely risky thing to do. But that doesn’t invalidate your point that capital accumulation of wealthy people generally far outweighs any amount of money they would make from their labor. It doesn’t have to be call options though, with enough wealth even interest from T-bills would dwarf a $300k salary.

You are still missing the point. With QE, the call options are far less risky than they look. It has been this way for over a decade. People somehow cant get it into their heads, when the fed prints money, assets go up. Capitalists are having an all you can eat buffet while everyone else thinks the only thing they can do is put 3k into the SPY every month. Its a joke

Yes, in "normal times" of the past decade, when you invest in call options, you are basically being compensated for discounting the risk of a crash at any particular moment.

But there's no free lunch - the risk you are taking is being priced in, but sometimes the actually risky thing does happen.

This line you keep repeating about "only the lower classes" xyz while the "true rich" have some deep wisdom is belied by the fact that rich people become not-so-rich trading options every day.

It's straight out of the "this one trick they don't want you to know about" advertising playbook.

Re: Does QE Cause Wealth Inequality?

#57

Post by nly » Tue, Nov 16, 2021, 6:22 PM UTC

88913527 wrote: post #29

When many people have few assets, and few people have many, and you cause the value of assets to go up, the nominal gap between two is larger, but the relative amounts are the same. This is basic math. Suppose we have two individuals who experience 25% growth due to QE: Person A: $1,000 * 25% growth = $1,250 Person B: $1,000,000 * 25% growth = $1,250,000 Originally, the wealth gap between A and B was 1000:1. It remai…

Compounding returns makes growth exponential. When you look at it that way the rich guy is just further up the curve, but you're on the same trajectory.

In your simple example (25% returns annualised) he's only 31 years ahead!

Don't you just feel better now?

Re: Does QE Cause Wealth Inequality?

#58

Post by nybble41 » Tue, Nov 16, 2021, 6:23 PM UTC

bradleyjg wrote: post #13

photochemsyn wrote: post #8

It doesn't necessarily, but there are some issues to think about: 1) Interest rates that are low mean that middle-class savings accounts don't grown in size. QE requires low interest rates as I understand it. 2) MMT is linked to QE but guess what, an oligarchic system isn't going to distribute QE capital to middle class and poor people, it's going to go into the pockets of the ruling class. In any case, you really ca…

> QE requires low interest rates as I understand it. It’s the other way around. QE lowers interest rates; that’s the main purpose. The idea is that low interest rates force investment in risky ventures (since safe ones are offering low yields) and those risky investments on net will generate excess economic growth.

The problem being, of course, that those risky investments were considered "risky" for a reason. A fair assessment, in the absence of forced incentives, would say they're more of a net liability than a net asset. Better than having your funds confiscated, perhaps, but otherwise not worth considering. When they fail (as many of them inevitably will) those failed investments result in waste and economic decline, not growth. And as usual the less-sophisticated investors will bear the lion's share of the losses.

Re: Does QE Cause Wealth Inequality?

#59

Post by AnotherGoodName » Tue, Nov 16, 2021, 6:23 PM UTC

dageshi wrote: post #11

Ericson2314 wrote: post #6

The thing is we want less stupid speculation and asset bubbles and yet the economy is running far below potential, with the "tight labor markets" right now just a glimpse of how it was before (and probably a fleeting one if the inflation class warriers have their way like in the 1970s). To fix both problems --- because we need to stop just making ourselves poorer and less coordinated with prudish neoliberalism --- we…

I'm still yet to understand how a lot of relatively poorly paid work that probably still needs to be done, gets done under UBI. UBI leads to people not doing particular jobs because sitting at home on UBI with less but enough money is preferable. Which means those jobs have to pay more, which leads to inflation which leads to UBI raising to keep up with inflation... repeat?

For the cycle you propose the increase in inflation would have to be equal or greater than the increase in pay.

If there's an increase in wages and the increase in inflation in response is lower then there's and effective wage increase despite the inflation. Which is simply the desired outcome.

An increase in inflation that matches or outpaces an increase in wages should only happen if wages are 100% of the cost of goods/services. So the cycle you propose should be a non-issue.

Right now i feel that we've been so scared to increase wages that we've simply made wages pointless altogether. Assets from second hand cars, to houses, to shares are all skyrocketing in value. I can't imagine people working for minimum wage and looking at the value of the house they rent go up by 10x more than their salary each month and thinking this is ok. We've been so scared of increasing wages because of inflation fears yet we've allowed all the QE to go into assets. It's led to an imbalance of wages compared to the cost of assets. There's a need for market correction from the government to get wages back in line with the value of assets and as long as any forced increase in wages isn't leading to inflation that outpaces the increase it's a perfectly reasonable solution to pursue.

Re: Does QE Cause Wealth Inequality?

#60

Post by bhupy » Tue, Nov 16, 2021, 6:23 PM UTC

88913527 wrote: post #29

When many people have few assets, and few people have many, and you cause the value of assets to go up, the nominal gap between two is larger, but the relative amounts are the same. This is basic math. Suppose we have two individuals who experience 25% growth due to QE: Person A: $1,000 * 25% growth = $1,250 Person B: $1,000,000 * 25% growth = $1,250,000 Originally, the wealth gap between A and B was 1000:1. It remai…

That's the logical hypothesis, but the article we're commenting on seems to show that it's more complicated.

FTA:

"The logical case for why the Fed’s activities cause wealth concentration is that low interest rates and high levels of QE tend to boost asset prices, such as stocks and real estate, which are primarily owned by the wealthy. By making homes and stocks more expensive and unaffordable, it widens the wealth gap between those who owned those assets before the Fed began its QE vs those who were not yet significant asset holders when this occurred. There are other more nuanced arguments, but let’s start with that one, because that’s the main one.

If that’s the case, and QE is indeed a powerful force for wealth concentration, we should see that the nations that have the lowest interest rates and that have performed the most QE relative to their GDP, have the highest levels of wealth inequality, right?

In reality, we find the opposite.

...

The regions that did the most QE relative to their GDP, and that have had lower interest rates for longer, have less wealth inequality, not more, as measured by the ratio of the mean wealth divided by the median wealth.

If the prior theory was true, we should have seen the opposite. More of a correlation, rather than an inverse correlation.

...

I’m not making the argument that QE reduces wealth concentration, because that’s not the case either. Instead the point is, it’s complicated. QE and interest rates by themselves are significantly uncorrelated (or even inversely correlated) variables vs how much wealth concentration a country has, when comparing between countries.

That is an uncommon view, but that’s simply how the math works out. Clearly we need to look at the nuances."